Intuitive Surgery in my books
There should be no one who does not know the Da Vinci medical surgical robot, right? Da Vinci medical surgical robot is now more famous than the company, Intuitive Surgical. I also mentioned this company in the preface of my book “The Rules of Super Growth Stocks Investing“.
In section 3-4 of the book “The Rules of 10 Baggers“, pages 152-153, I mentioned this company when discussing the main large pharmaceutical companies and medical equipment companies in the US stock market; especially the entire section 5-3 , are used to introduce the company Intuitive Surgery.
Monopoly
Intuitive Surgery (ticker:ISRG ) might be considered a monopoly. However, readers may be less familiar with this company among the others we have discussed. What does Intuitive Surgery do, and why do we think it’s a monopoly?
Not regulated, but a substantial monopoly
Intuitive Surgery is completely different because it has nothing to do with government regulation or legal monopolies, at least not with government regulation. This is a company that innovates into their product, which is a minimally robotically assisted, easy to me, invasive surgical robot that can perform many different types of surgery.
The product cannot find a strong rival
Their products are truly the best and have been around for years. That did bring it up to its current leadership position in terms of market share, with Intuitive Surgical having about 80% of the surgical robotics market. Not necessarily a monopoly by definition, unless it exceeds 50%. But we’re not currently seeing them hurting consumers in any way or trying to charge prices that would hurt consumers or hospitals in some way and ultimately patients.
Attractive business model
But this is a very strong company. It’s the classic razor or razor blade model where you buy the robot, but then you always have to buy the instrument that goes with the robot for each follow-up procedure, so you get the recurring income stream.
The only regulated part of the business, if we want to call it that, the FDA is interested in anything that has to do with surgery or drugs or medical devices. It was approved, I would say in 2000, I think that was 23 years ago at this point. But that seems to be relatively recent, because frankly, the robotics market isn’t that old. They do a great job. Surgery has had its ups and downs as the COVID-19 pandemic has put many elective surgeries on hold.
Strong moats
market rule breaker
But Intuitive Surgery has crushed the market since its inception. crushed the market over the past five years. This is a company that typical growth investors are interested in, and the business it is engaged in is easy to understand, and it is a so-called market rule breaker. If investors had discovered this company twenty years ago, they should have made a lot of money. For a conservative investor, that kind of growth, that kind of unknown about the future is always a little bit nerve-wracking. But this company has done an incredible job, and very well. The potential market is still huge!
Too many people are interested, but end up giving up
A lot of other medical device companies or people, or companies in the field want to get into this industry. You’re implying that by saying they have the best technology. But what’s stopping another company from trying to catch up to Intuitive Surgery? What kind of moat have they carved out for themselves?
Barriers to entry are too high
The most important thing is cost, research and development of cutting-edge robots. There are a lot of companies with a lot of money. So it’s not impossible. But you have to develop it and it takes years to get FDA approval.
First mover advantage
And then you also have to build relationships with hospital systems and convince those hospital systems to move away from intuitive surgical da Vinci robots, which is just too difficult. So once you’ve established a connection with your customers and clients, it’s very difficult for another company to come in. This often happens with simple things like soft drinks or restaurants or different retail products because those things require FDA approval and it’s very important because it’s performing surgery that’s becoming more entrenched and hard to usurp and kick out them. That’s not to say there won’t be other robotic surgery companies over time, but Intuitive Surgery has a very, very big head start.
A common theme across all these companies seems to be the very high cost of entry. Whether laying the groundwork for utilities, railroad tracks or robotics. Much like robotics in hospitals now looks like a hospital utility. Yes, the classic barriers to entry, one of which is extremely high cost of entry or R&D expenses, can provide a moat in some cases.
Capital market performance
Valuation
This is a growth company through and through, and has always been and will be. Therefore, trading in multiples implies significant growth, which needs to grow significantly in the future to meet investor expectations. As such, it could trade at around 70 times current P/E. But let’s look at the forward PE ratio for the next 12 months, almost 50 times forward PE ratio, 50 times, and the S&P 500 at this time is only 22 times or 18 times. Therefore, comparing companies in the same industry, the market trades at a forward PE ratio of 18 times. Intuitive Surgical trades at a forward PE ratio of 49, more than double the market.
Outlook
The valuation is high, and that’s because investors assume or predict that the company has a very large growth runway and will continue to do so in the future. If they don’t, then investors won’t do well because the stock is very expensive in that sense. So whenever you invest in a company with a high PE ratio and a lot of growth in the current share price, you hope, you expect future growth to materialize, and if it doesn’t materialize, that’s when the stock gets hammered.
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